Retirement is different
Considerations and opportunities
August 2015
This information is current as at August 2015 unless otherwise specified and is provided by Challenger Life Company Limited ABN 44 072 486 938,
AFSL 234670 (Challenger), the issuer of the Challenger Annuities (Annuity). It is intended to be general information only and not financial product
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Agenda

Retirement is different

Key retirement considerations
- Longevity – the ‘how long’ of retirement
- Sequencing – the down and ups of markets matter
- Inflation – the ability to maintain spending power
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
Age Pension changes from 1 January 2017

Reviews – integral to success
Retirement is different
A time of change
• Retirement brings a host of challenges and
uncertainties
• You will no longer be receiving a regular income
from employment
• You may rely on a combination of superannuation,
other investments and the Government Age
Pension
• Lifestyle changes
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Retirement is different
What does your retirement look like?
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Retirement is different
What does your retirement look like?
Sydney Morning Herald, Sydney 4 August 2015.
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What is important to retirees
National Seniors Australia Survey
1. Health
Medium priority
Source: National Seniors Australia – Retirees’ Needs and Their (In)Tolerance for Risk – March 2013.
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Bequest other
Bequest home
Accessibility
0%
Volatility
6. Accessibility
20%
Inflation
5. Volatility
40%
Peace of
mind
4. Inflation
60%
Longevity
3. Peace of mind
Low priority
80%
Health
2. Longevity
% of survey respondents
High priority
Retirement is different
Success through careful consideration
Managing some of the key risks in retirement is an important part of achieving a
successful retirement
Longevity
Sequencing
Inflation
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Retirement is different
Longevity
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Retirement is different
How long do you expect retirement will be?
1. Australian Life Tables produced by the Australian Government Actuary.
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Retirement is different
Longevity a key retiree consideration
Source: Challenger estimate from Australian Life Tables 2010-12 with 25 year mortality improvement factors from AGA.
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Retirement is different
Australian’s own expected life expectancy
Age group
Average estimation of
own life expectancy
Intergenerational
Report
Underestimation
50 to 54
81.4
88.5
-7.1
55 to 59
82.8
88.2
-5.4
60 to 64
83.5
88
-4.5
65 to 69
84
88
-4
70 to 74
85.4
88.3
-2.9
75 to 79
86.9
88.9
-2
Source: National Seniors Australia, How realistic are senior Australian’s retirement plans July 2014.
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Retirement is different
Investments
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Retirement is different
The addition of returns
TRUE or FALSE?
Initial investment of $100,000…
-5% return in year 1 and then +5% in year 2
Investment after 2 years is $100,000
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Retirement is different
The addition of returns
TRUE or FALSE?
Initial investment of $100,000…
-5% return in year 1 and then +5% in year 2
Investment after 2 years is $100,000
$100,000 after -5% return = $95,000
$95,000 after +5% return = $99,750
In fact, on $95,000 a 5.263% was required to be equal!
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Retirement is different
Order of returns
Initial investment of $100,000…no withdrawals
-5% return in year 1 and then +5% in year 2
equals
$99,750 at the end of year 2
Would the answer be the same if the returns were reversed?
YES
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or
No
Retirement is different
Order of returns
Initial investment of $100,000…no withdrawals
-5% return in year 1 and then +5% in year 2
equals
$99,750 at the end of year 2
Would the answer be the same if the returns were reversed?
YES
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or
No
Retirement is different
Sequence in retirement
Initial investment of $100,000…$5,000 p.a. withdrawals1…
-5% return in year 1 and then +5% in year 2
equals
$90,006 at the end of year 2
Would the answer be the same if the returns were reversed?
YES
1. Assumes withdrawals are made regularly during the year
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or
No?
Retirement is different
Sequence in retirement
Initial investment of $100,000…$5,000 p.a. withdrawals1…
-5% return in year 1 and then +5% in year 2
equals
$90,006 at the end of year 2
Would the answer be the same if the returns were reversed?
YES
or
$100,000 after +5% return = $90,125
$105,000 after -5% return = $89,506
1. Assumes withdrawals are made regularly during the year
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No
Retirement is different
Sequencing risk – Order does matter in retirement
$1,600,000
$1,400,000
Account balance
$1,200,000
$1,000,000
$800,000
$600,000
Retiree A (actual returns and inflation from 1979 to 2011)
Retiree B (same returns and inflation, but in reverse chronological order)
$400,000
$200,000
$0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32
Years into retirement
Source: Challenger estimates using ABS, S&P/ASX accumulation with UBS and Commonwealth bank bond indices .
Assumes retiree draws ASFA comfortable standard of living $42,254 indexed to CPI each year.
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Retirement is different
Inflation
Assumes annual inflation of 2.5%
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Retirement is different
Maintaining your purchasing power
After inflation value of $1,000
$1,200
$1,000
$800
$600
$400
$200
$0
0
5
10
15
20
25
30
Year
0% inflation
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2% inflation
2.5% inflation
3% inflation
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Retirement is different
The government safety net
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Retirement is different
Proportion of people 65+ receiving some element of a
government pension
% people 65+ 2011
Full rate Age Pension
41%
Part rate Age Pension
27%
Total on Age Pension
68%
DVA (65+, ex age pensioners)
8%
Total on some kind of government
pension
76%
Proportion not receiving a government
pension
24%
Source: Department of Families, Housing, Community Services and Indigenous Affairs; Department of Veterans’ Affairs; Challenger
estimates
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Retirement is different
January 2017 Centrelink changes
From 1 January 2017:
•
Taper rate change - $3 per $1,000 from $1.50 per $1,000
•
Assets Test thresholds will change (detailed below)
Legislated
Single, homeowner
Single, non-homeowner
$250,000
$450,000
Couple, homeowner
Couple, non-homeowner
$375,000
$575,000
Couple, illness homeowner
Couple, illness non-homeowner
$375,000
$575,000
Based on projected rates and thresholds at 1 January 2017.
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Retirement is different
Measuring the impact – couple homeowners
Assessable assets
Age Pension received at
current $1.50 taper rate*
Age Pension received
under rebalanced Asset
Test measure
Reduction in pension
income received
$451,500
$28,956
$28,956
$0
$500,000
$27,065
$25,173
$1,892
$600,000
$23,165
$17,373
$5,792
$700,000
$19,265
$9,573
$9,692
$800,000
$15,365
$1,773
$13,592
$823,000
$14,467
$0
$14,467
$900,000
$11,465
$0
$11,465
$1,000,000
$7,565
$0
$7,565
$1,100,000
$3,665
$0
$3,665
$1,200,000
$0
$0
$0
People with assessable assets below $289,500 will see an increase or
no change to their Age Pension benefit
*Based on projected pension rates at 1 January 2017.
Source http://www.liberal.org.au/latest-news/2015/05/07/fairer-access-more-sustainable-pension, viewed 7 August 2015.
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Retirement is different
Measuring the impact – single homeowners
Assessable assets
Age Pension received at
current $1.50 taper rate*
Age Pension received
under rebalanced Asset
Test measure
Reduction in pension
income received
$289,500
$20,085
$20,085
$0
$300,000
$19,676
$19,266
$410
$400,000
$15,776
$11,466
$4,310
$500,000
$11,876
$3,666
$8,210
$547,000
$10,042
$0
$10,042
$600,000
$7,976
$0
$7,976
$700,000
$4,076
$0
$4,076
$800,000
$0
$0
$0
For those with assessable assets below $289,500 will see an increase or
no change to their age pension benefit
*Based on projected pension rates at 1 January 2017.
Source http://www.liberal.org.au/latest-news/2015/05/07/fairer-access-more-sustainable-pension, viewed 7 August 2015.
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Retirement is different
Understanding the change
• Changes take effect from 1 January 2017
• Commonwealth Seniors Health Card (CSHC) available to retirees who
loose the Age Pension
• Your adviser can
- Discuss the impact of the changes
- Review your current investments
- Identify strategies to help improve your age pension entitlement
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Reviews
Keeping on track to succeed
Retirement is different
Keep things on track
Personal
changes
Review
investments
for changes
Retirement
Vision
‘review and
update’
Financial
changes
Future cash
flow needs
Adapted from GDC Research and Practical Perspectives, Serving retirement income clients: A best practices guide for advisors
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Retirement is different
Financial advice covers many areas
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Any questions?